Paul Koenig sent an email to a third party, which was forwarded to me, and said as follows...
(Name Withheld from salutation)
I guess this would go far above and beyond simply responding to the questions.
1. Pamiko's business plan was to purchase undervalued/appreciated properties and turn them into lead safe affordable efficient housing in the metro area. A model/plan was identified whereas there was a rental demand for renters that tired of inefficient and unsafe housing. In talking with many people in different neighborhoods over the years it became evident that people in the community are tired of looking at properties that are sitting idle and detracting rather than contributing to the city. It was certainly frustrating to hear story after story of Tenants citing high utility bills in the hundreds of dollars each month due to inefficient weatherization issues with their current or former housing. I found that in talking with many homeowners in the same areas the similar issues held true as well. Over the years I have heard of and seen multiple issues related to children getting lead poisoning in homes. I believe this is a very serious issue.
The goal was to create affordable, lead safe, energy efficient housing for families. From ceiling to floor the home typically received complete makeovers. New sheetrock, windows, tile floors, new bathrooms, kitchens, doors, sub-floors, energy efficient forced air furnaces, water heaters, wiring, plumbing, and in most cases siding and roofing. Most of the properties we acquired required a complete code compliance inspection form the city. Most of the time we would have no less than 5 different inspectors form the city to inspect and sign off on the work. We typically did the same improvements to all homes whether they were a code compliance home or not. Our inspections of most of the properties showed structural integrity was incredibly solid, yet the property had years of neglect into them.
At times there were properties that were absolutely incredible and could fit into the program very well, but after talking with people in the neighborhood and understanding criminal activity avenues we passed on many. One of these properties that we had a purchase agreement on and ultimately passed on was 2020 Penn Ave N. The bank and the city were at odds with each other. I must add that it was at the bank own doing and not the fault at all of the City. From what I understand the City bent over backwards to work with them and received little help on the other end. We eventually canceled our Purchase Agreement and walked away, the property was demolished and it is a vacant lot now. The property itself was a great looking Spanish style house that was great, it was just the location and/or management of the home that must have spelled its demise. I did not take the time to do a historical analysis together on the property.
Whatever the situation, however, I believe that it was better off not getting into that property and ultimately decided to vote with our feet and walk away from that property. Pamiko walked away from many properties and many properties were demolished yet many are still around. Many many of these properties had rehabbers buy them and put $10-20k or even $30-40k into them and, in my opinion, are substandard. Many of these rehabbers put most all of the monies into cosmetics and really do not do the needed improvements to the properties. I have heard of and witnessed rehabbers talking about tiling the entire properties so they don't have to replace carpet. It is certainly disappointing to hear that. What type of home environment does that does that promote? What type of tenant does that attract?
Pamiko met or exceeded all city requirements for improvements and bringing properties up to code. Any statements to the contrary would be saying that the City inspections department is incompetent. We have found the inspectors to be very competent. On any given project there were multiple inspections by no less than 4 or 5 separate certified city inspectors. The Inspections department does not have an easy job. They have a responsibility to promote housing stock to increase the tax base while also being responsible for carrying out the order to demolish properties as well. Vacant lots do not pay for schools, police, roads and many other things. Fully functional properties do add to the tax base.
It was Pamiko's intention to put some supply/demand pressures on other landlords by offering a property that tested as lead safe with high efficiency HVAC and a complete rehab down to the bone. Tenants would easily migrate to our properties. Many of the tenants also worked with long standing social-working pillars of the community that are well respected. Pamiko and the social service agencies had the same goals. Screw up this nice place and you are out of the program. Some did screw up, but most succeeded.
Pamiko also participated in the Minneapolis police "Action Alerts" program. These reports are great, we are notified within a few hours and have talks or discussions with the tenants within a few hours after an incident occurs. Several of the notifications lead to tenants moving out through a series of productive and cordial discussions. Other reports neither the tenant or landlord could really do anything about, as it was outside unrelated individuals. On a couple of occasions we would get a report of marijuana smell at a property.
I have learned over time that there is not much one can do over a small amount of Marijuana. I really don't get the tolerance of this, but that is the law whether I like it or not. That is not to say that I cannot have a good conversation about doing this around children or neighbors and is this how one wants to represent their selves. The conversation usually ends with an agreement that they will refrain from doing it at the property and they understand what I am saying. Most of the time, it is a precursor to the end of the tenancy because the need to smoke if far greater than the agreed upon point talked about in the conversation. There are victories here and there, but like anything else in life, the lost battles sure seem to have that bad taste in your mouth when you think of it.
After a period of time Pamiko had completed around 3 dozen projects. Pamiko looked to do one more pool as others in the business were starting to bid up the properties to what was we believed to no longer be an undervalued price point. Pamiko was talking with its lead bank on a weekly basis if not 2 times per week. We had just received the go ahead from the lead bank to move forward on a final pool of properties. The bank sent out their appraiser and we were set to move forward as usual. I was constantly assured that the closing was the following week and that we were good to go. It appeared that the banking crises came down across the entire lending industry just about the time the ink dried on the last purchase in the final pool. The bank told us the appraisers came in where they had approximated and we where all good to go. I was not worried. I had a large capable bank that had just completed 35 deals in the identical fashion.
This went on week after week and then month after month. Then I saw in some publications that the bank had some large losses in a southwest affluent suburb and the bank officer shared a few other issues of loss as well as a very large loss in a far northern suburb. Shortly thereafter I saw they had a large commercial building loss in downtown Minneapolis. Losses were affecting the votes for approvals on all projects I heard. I was still constantly reassured we should be good to go shortly because the owner of the bank likes our projects. The bank continued to string me along. I did seek out other banks that did 3 of the projects in the final pool over the next year. I had come to find out that nearly every bank in town shut down their lending. Pamiko had several other sources that assured them of financing for the properties, but when it came time for approval, North Minneapolis suddenly became "out of their lending area".
By this time Pamiko had already made commitments on many fronts and was already neck deep into the process. It is not like you can "un-purchase" or return property. Pamiko had in hand a financing letter in hand that was even provided to the City specifically referencing property within the last unfinished pool from this lead bank. It appeared that banks were intentionally stringing us along only to find out they were being closed. Bank after bank would tell me "off the record" that they will not lend in North Minneapolis. I have heard this before, but now I was hearing it consistently. It really made me upset and offended. I had met so many good people in North Minneapolis. I would and sit and boil about it, then there would be a robbery or shooting or even infighting between decent people in the news only confirming what the bankers would throw in my face about the neighborhood.
I just decided to keep doing what I do and concentrate on the good rather than the bad. I continued to try to finish the remaining properties and seek the required financing. All the time while things slowed down my equipment was stolen, windows broken, copper stolen, supplies stolen from inside locked properties, houses trashed by kids, even a property burned down (for a second time at different addresses). I have around 20 dumpsters filled with neighborhood trash. It is interesting how a completely vacant house would end up with a dumpster with 20 tires and 5 refrigerators in the dumpster (this happened at two different addresses 1608 and 1611 hillside avenue as well as other addresses.
There is a property in South Minneapolis that had 11 refrigerators in the alley overnight. Where do these things come from. Yet I kept the faith because I really respected a lot of the people that I have in North. I understood their reasoning for moving to north from other neighborhoods. Core urbanization rational for living space location appeared to be the rational for both owners and tenants. Being in close proximity to those who are like minded is obviously an inner draw. Unfortunately, the true center of the urban areas will many draw polar opposites and the polarization becomes so intense that it is hard to exist amongst each other. I have been aware of many of the nuances of the polarization and saw the recent wave of foreclosures as an opportunity to raise the standards by putting out a higher quality product and attracting more desirable neighbor. Although I am very conservative in most of my views, I tend to believe that people inherently desire to be good. If a person is put in a good situation they will be far more likely to succeed.
Over time Pamiko had an extreme amount of success with most of their tenants. Sure there area few bad eggs here and there. Those that failed, ultimately failed their selves out of their social services aid as well. It was not uncommon to see an individual that violated our lease to also ultimately lose their social assistance as well. It required a lot of follow through after we terminated their tenancy but it ultimately would open up a funding spot for some unknown and better deserving family somewhere out there. Other homeowners told me they moved here for the incentives and because it was cheap. I can respect that as well.
After one year of being strung along by our lead bank, Pamiko started to pressure the bank by writing emails and letters to the bank president referencing the promises that were made. The bank responds by putting pressure on Pamiko by increasing the interest rate nearly 3 times higher than the contractual amount. The lead bank charged this high rate of interest for a long period of time. In nearly 4 months of 2009 I paid more interest that I had for all of 2008. Ultimately a short term deal was executed while we worked on a global deal addressing my concerns. The bank once again promised they would make a strong move toward the promised financing for the final pool of properties. A short time passed and I met with the owner of the bank he looked me in the eye, shook my hand and told me that I could consider the deal done. A few more months passed by and the promise of financing continued to be brushed off.
Upon advice of my lawyer we decided to make a stand by asking for a face to face meeting with the owner of the bank. We had properties that have been sitting idle for far too long and the only one benefitting from this situation was the bank. They had a hay day from the recent interest increase rate income windfall they created in their favor. The bank responded by immediately accelerating notes and making them immediately due in full. It was my position, armed with documented agreements and account statement that I was over charged nearly $100,000 in interest charges. I wanted my credit balance addressed as well. Over the last year I exhausted almost every resource I had to go as far as I could on the properties in the last pool and continue to make upgrades and repairs as necessary on the existing properties. I liquidated all of the valuable assets from another successful business I had as well.
My lawyer started the meeting by stating that we were looking for a long term deal. We stated that if the bank hired an outside management company the properties would soon spiral downwards because they are unfamiliar with the area, neighborhoods, and the tenants among other things. The ultimate and quick response was that it was the banks intention to take the properties back and just clip their coupons and that they would rather that be the only option. In all of just a few minutes of all the hard work I done and invested I was suddenly being given an ultimatum to chock down the only option available. If they don't want the properties then there are a world of options. Even though there was now an understood deal in place the bank continued to forge forward to place added pressures on me to ensure that I sign the deal. The bank swiftly moved to appoint a receiver.
Pamiko objected to the particular receiver because we had seen how this particular company has let properties deteriorate. Nonetheless, the receiver was appointed. The bank additionally proceeded with a foreclosure action/summons. All this is done while while there is an understood agreement already in place for the bank to take over ownership of the properties. I had no intention of wanting to give up the properties, but it was the only viable option short of litigation. The banking officer that made all those promises and wrote finance letters was abruptly fired at the start of my hard stand.
In talking with outside bankers and lawyers the first thing they ask me is show me a document or something in writing from this lead bank. All I could do is say, well, I was told or promised it was a done deal and I have some minimal documentation. As silly as it sounds, the commercial world is far different than the consumer world. Banks can say anything they want and it does not matter unless it is in writing, the right kind of writing too it appears. How can you force a bank to do a commercial loan if they ultimately do not want to? Most all banks have what insiders commonly refer to as "get nervous clause". That is, they can raise the interest rate if they simply feel uncomfortable with anything, even if it is just the market itself. The bankers from other lending institutions tell me that it is unfair, but welcome to commercial banking they say. All back up plans appear to follow rapidly follow the identical process.
Apparently regulators were shutting down commercial lending across the board and penalization banks that did new lending while we ad Obama encouraging bank to lend. One banker was so upset that he showed me a document that specifically stated no commercial real estate lending others. Other banks would show me articles showing what the regulators were doing and how it was crushing the country. Coincidentally both bankers in those examples I referenced where with banks that have been seized by the FDIC. It was amazing that I had a stack of 30 or so business cards from only 2 years prior and only 4 of them were still at the same jobs. As time goes on, many of these back up plans are banks that eventually went under and had no shot at lending money during the time I was talking with them. Unfortunately, banks with cease and desist letters or "agreements to stop lending practices" are not readily available to customers or the public.
Over the course of time It was not Pamiko's worry so much about the valuation of the properties over the short term because we had absolutely no intention of selling for a long times if ever. We stripped the properties down and rebuilt the cores so these were solid properties for the long haul. So a piece of siding may come loose in a wind storm or carpet and paint is needed....big deal, those are only fractional costs in the long term plan. Pamiko understood that the properties over time would be a great investment in the community and the properties were properly leveraged for the long haul (65% LTV). Pamiko would typically purchase a property and put up to $150k additional into a duplex. This would be far superior to what any so called rehabbers were doing to rental properties.
Many of the single family homes for sale to homeowners were not doing these type of improvements either. I had no problem putting as much as I could into the properties, because I intended on holding onto them for a long time so I needed the nuts and bolts of the property to be very sound. I never could have imagined the property value of these properties dropping to have of what the loans I had on them. I went from 65% LTV to over leveraged in a matter of months it seamed. Every month that went by, the chances of financing grew worse and worse. IT soon became evident that for every $1 I put into the property, it instantly became worth less than 50 cents on the dollar.
Eventually I had no other choice but to sell assets from other business and stop paying myself as the unfinished pool was killing us. I was only taking a salary from Pamiko of $3k/mo and ceased paying myself for many months prior. Employees voluntarily took a wage cut. Every corner was cut that could be without sacrificing quality. In 2009 the market dipped to a point that properties could be purchased in North Minneapolis in a similar condition for half of what it would cost for me to completely rehab it. I still contend that these "so-called" market comparable properties are not lead safe and don't have all the internal upgrades. They still looked nice and brought in the same rents as I charged. Although the cash flow supported to amount of planned rehabs I wanted, the comps in the neighborhood would not support anywhere near the amount of funds needed to do the deals. Why not do the deal at the smaller amount? We did with the 3 from the last pool with alternative banks.
But even then, by that time, the other banks were willing so long as the lead bank would make a more of a stable commitment. Other banks would tell me that my lead bank has some serious troubles and that I should be careful. As time went on, I realized that the bank most likely had it hands tied behind the scenes. I an not sure why they persued the acquisition so aggressively and swiftly. As time wears on, It is quite apparent that they are in way over their heads and it is not as easy as "clipping coupons." There are countless phone calls for unresponsiveness to tenant issues. I still receive the action alerts on the properties and the police calls have gone from here and there to multiple happenings per week. Unfortunately, many of the tenants have moved out of the properties and there are new ones in there. Turn over is one way the management company makes money. I recently discovered that management company has spent $4000 on repairs and maintenance from September through December 2009. In that same time period they made a fee of nearly $40k. That seems to be a lot of money for a full voice mail and unanswered tenant calls. Perhaps being unresponsive is one way to keep the repair costs down.
The recent events surely show how a property or group of properties that is poorly managed can rapidly spiral downwards. Fortunately, the properties are internally sound and the wear and tear done by a few of the new tenants here and there are easily corrected with a little effort. In September of 2009 it was the new management companies responsibility to run the properties in their entirety. The properties appeared to run fine for a while and then I was besieged with former tenant phone calls complaining of not being able to get a hold of anyone for very routine maintenance calls. Multiple phone calls and emails garners little if no response as well. This was echoed by neighbors who were calling the management company as well. Eventually the seriousness of the repair issues increased here and there.
At 2420 Bryant Ave N there was a report of a kids messing around in the basement knocking off a sewer pipe for the kitchen in the first floor unit. When I received the message I left a message for the management company. I not only had keys any longer to the property, but I was court ordered let the receiver handle any and all repair issues. Just the other day, the tenant commenced a emergency relief action, of which, I was promptly dismissed at the hearing. I stuck around during the hearing and offered assistance in resolving the matter to both sides. The Legal Aid society graciously accepted my help/suggestions while the new management company refused to budge on their position. The hearing date was set out for 30 days pending a settlement agreement between them. I encouraged the tenant to make all requests in writing in the future so she has some sort of documentation or proof with the management company. The lease calls for repair requests to be in writing. In the conversations with the tenant and their attorney she told me that we always responded to her calls immediately and had no issues with Pamiko.
2. At the banks request on commercial loans, it is their preference to cross collateralize properties amongst each other. All properties I did were funded initially out of pocket or via individual loans. Most of the time they were rolled into one bulk approval and grouped accordingly.
3. I was ready and willing to refi (as well as promised) well in advance, however the bank raised my interest rate from 6.25% interest only to 16.5% across the board on all of my loans. This was slow played out and the fees continued to run up ($7,000,000 at an additional 10%, plus legal fees for several months). In the closing the property taxes were to be taken care of in their entirety. Not a penny went into Pamiko's pocket in this closing. Or better stated, other than taxes and their lawyer, the bank made points, fees and amped up interest. As an end result, my payments went up tremendously further worsening the situation overall situation.
Pamiko did everything by the city guidelines put in place to provide lead safe affordable and energy efficient housing. There are not that many housing options out there in the neighborhood that are energy efficient and lead safe or lead free.
Pamiko still feels that having the following are important to families:
Lead safe housing for children
Energy efficient homes
Unlimited laundry that was not coin operated at each duplex
New energy efficient windows
Even bath fans were installed (it is amazing how many 1-4 unit homes do not even have bath fans).
Ultimately I feel that having a lead safe home is right at the top of the list. Apparently the City of Minneapolis does as well. I receive many many lead safe fliers from their mailings. I would like to put a friendly challenge out there for detractors and supporters alike to have their homes lead tested. I am somewhat aware of a few detractors in the neighborhood and understand some of their frustration. I have offered to speak to them off the record in an effort more intimately discuss any genuine issues that they may have regarding the neighborhood. That offer was "not worth their time."
I was perplexed that if someone was attempting to be a good steward of the neighborhood that they would accept the offer, at least, as a starting point. There are countless individuals in the neighborhood that have supported Pamiko's position and kept the lines of communication open to ask and answer any questions that they may have. I would like to thank them for their sincere care for the situation and the community. It is refreshing to experience that with people that genuinely care about the good of the neighborhood. One of them told me that it is easy to cast stones. They told me that it is unfortunate that you took the stone, put it back together, scrubbed it up and polished it into a gem. Shortly thereafter the next guy comes along and turns it back into a stone and people start throwing it around. When the conversation ended and I walked away I thought that he certainly put a lot of thought into that analogy.
I can say that if the lending institution simply fulfilled their obligations to me, then there would be a lot of gems out there rather than gems turned stones. There are a lot of people that are familiar obtaining a full code compliance certificate as well as a successful lead safe clearance. To those that are not, you can rest assured that it is not an easy thing to secure. Pamiko obtained these on a very routine basis. It was not easy, we did not expect it nor want it to be easy either.
The bank owns the properties now. They were deeded the properties many months ago. I have long been away from the properties. I would hope the management company picks up the pace a bit, they certainly able to be well funded and capable of running the properties at an acceptable level if they are motivated to do so. A $4000 figure on repairs and maintenance for 2009 was listed in their report supplied to the court. $4000 for around 80 units is not very much in my experience.
(End of email)